What Do We Talk About When We Talk About Output Gaps?

By Jelle Barkema, Tryggvi Gudmundsson, Mico Mrkaic

November 20, 2020

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Format: Chicago

Jelle Barkema, Tryggvi Gudmundsson, and Mico Mrkaic. What Do We Talk About When We Talk About Output Gaps?, (USA: International Monetary Fund, 2020) accessed December 30, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Estimates of output gaps continue to play a key role in assessments of the stance of business cycles. This paper uses three approaches to examine the historical record of output gap measurements and their use in surveillance within the IMF. Firstly, the historical record of global output gap estimates shows a firm negative skew, in line with previous regional studies, as well as frequent historical revisions to output gap estimates. Secondly, when looking at the co-movement of output gap estimates and realized measures of slack, a positive, but limited, association is found between the two. Thirdly, text analysis techniques are deployed to assess how estimates of output gaps are used in Fund surveillance. The results reveal no strong bearing of output gap estimates on the coverage of the concept or direction of policy advice. The results suggest the need for continued caution in relying on output gaps for real-time policymaking and policy assessment.

Subject: Balance of payments, Business cycles, Current account balance, Economic growth, Inflation, Output gap, Potential output, Prices, Production

Keywords: Business cycles, Current account balance, Delta real-time output gap, Fiscal policy, Global, Inflation, Monetary policy, Output gap, Output gap coverage, Output gap estimate, Output gap measurement error, Output gap uncertainty, Output gaps, Output gaps discussion, Overestimated output gap, Potential output, Underestimated output gap, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/259
Stock No:

WPIEA2020259
ISBN:

9781513561257
ISSN:

1018-5941

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